Theory question 104
Company Accounts(a) State three differences between equity shareholders and debenture shareholders.
(b) Explain the following types of preference shares.
(i) cumulative preference shares; (ii) redeemable preference shares; (iii) participating preference shares.
Show the model answer
(a) Any three:
- Equity shareholders are owners (members) of the company; debenture holders are creditors (lenders).
- Shareholders receive dividends that depend on profit; debenture holders receive fixed interest whether or not there is profit.
- Shareholders have voting rights; debenture holders do not.
- Debentures are usually secured on assets and repaid on a fixed date; shares are not secured and not normally repaid.
- On winding up, debenture holders are paid before shareholders.
- Debenture interest is a charge against profit; dividends are an appropriation of profit.
(b) (i) Cumulative preference shares: unpaid fixed dividends of a bad year accumulate and must be paid in later years before ordinary dividends.
(ii) Redeemable preference shares: can be bought back (repaid) by the company at a stated date or at its option.
(iii) Participating preference shares: besides the fixed dividend, they share in surplus profits with ordinary shareholders after the ordinary dividend.
Owners vs lenders, then one sentence for each preference share type.